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Monetary policy under financial uncertainty

  • Williams, Noah

Monetary policy may play a substantial role in mitigating the effects of financial crises. In this paper, I suppose that the economy occasionally but infrequently experiences crises, where financial variables affect the broader economy. I analyze optimal monetary policy under such financial uncertainty, where policymakers recognize the possibility of crises. Optimal monetary policy is affected during the crisis and in normal times, as policymakers guard against the possibility of crises. In the estimated model this effect is quite small. Optimal policy does change substantially during a crisis, but uncertainty about crises has relatively little effect.

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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 59 (2012)
Issue (Month): 5 ()
Pages: 449-465

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Handle: RePEc:eee:moneco:v:59:y:2012:i:5:p:449-465
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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